Equipment Leasing: An Industry in Transition

By Parkes, Richard | Business Credit, February 1994 | Go to article overview

Equipment Leasing: An Industry in Transition


Parkes, Richard, Business Credit


The equipment leasing industry in the U.S. and abroad experienced phenomenal growth in the past decade and will continue to grow at an even faster pace. According to the U.S. Department of Commerce, the volume of leasing transactions in this country rose from about $85 billion in 1986 to almost $130 billion last year. According to the Equipment Leasing Association, 80 percent of corporate America uses leasing to acquire some or all of its capital equipment (including 50 percent of all mainframe computer systems).

Leasing Has Advantages

Leasing has several significant advantages over buying equipment outright. The risks of ownership are transferred to the lessor; it is cost-effective because it diminishes the risk of being stuck with obsolete equipment (a lessee can always upgrade or add new equipment); it can be 100 percent financed; and the term of a lease can be matched with the useful life of the equipment. Further, leasing carries tax advantages, and perhaps most importantly, enables a business to conserve operating capital. Cash isn't tied up in equity and lines of credit are kept free for essential uses.

Leasing is an industry that demands rapid and accurate credit analysis. This is important because the industry is highly competitive, and a credit decision put off today may mean a deal lost forever. Knowledge of present and residual (i.e. asset.value at the end of a lease) equipment values is essential. Therefore, in addition to financial expertise, a lessor must be thoroughly knowledgeable about the equipment itself.

Although almost any type of equipment can be leased, certain types are leased almost invariably because of their extremely high cost and the retention of significant value long after the initial lease. Commercial aircraft, magnetic resonance imagers (MRI), heavy construction equipment, railcars, shipping containers, mainframe computers, electric power generating equipment, trucks and trailers, and a lot of office equipment fall into this category.

Leasing Basics

There are four basic types of leasing companies. Banks and the leasing subsidiaries of bank holding companies are among the leading lessors. Also, there are so-called "captive" leasing companies (subsidiaries of major manufacturing firms such as General Electric, Ford, or General Motors).

Independent leasing companies are another component of the leasing industry. Many of these are small and specialized, in niche-markets requiring considerable technical knowledge; others are large, diversified firms. Also, there are investment banks and independent broker/packagers who initiate deals and bring the parties involved in a major lease together.

Most credit industry professionals are familiar with the basics of leasing, but may not be aware that it is an industry in transition, bordering on turmoil. Why? Because the very concept of long-term, predictable asset values has been placed in doubt by factors that no one anticipated a decade ago.

Keep Informed

Consider mainframe computers. Who would have thought only six years ago that networking inexpensive personal computers would have such a damaging effect on the mainframe industry? Mainframes--once the backbone of every computer manufacturer's product line (and, of most lessors blue chip portfolios)--have suffered tremendous erosion in value becoming mere commodity items (as has most computer hardware, no matter how advanced). The reason? Today's information industry is software driven, a development that hardware companies didn't anticipate.

Many equipment lessors deluded themselves by thinking they were funding stable, predictable assets on a long-term basis (three or four years). Actually, those assets were rapidly depreciating because of the advance of new, less expensive interactive technology and the market's acceptance of the new products spawned as a result.

Today, sophisticated lessors know they must keep abreast of each industry's dynamics by being diligent through all phases of equipment management and marketing. …

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